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Ecuador Law Forgives Debt on Defaulted Mortgages of First-Time Buyers

Posted about 5 years ago

Article Summary:

Ecuador’s legislature has passed a bill that would require banks to forgive any outstanding debt on mortgages for first-time home buyers of properties worth up to $146,000 if they default and forfeit the home.

Original Article Text From Wall Street Journal:

Ecuador law would forgive debt on defaulted mortgages of first-time buyers

Ecuador’s legislature has passed a bill that would require banks to forgive any outstanding debt on mortgages for first-time home buyers of properties worth up to $146,000 if they default and forfeit the home.

The measure, aimed at discouraging a real estate bubble of the type that has caused so much pain in the United States and Europe, won praise from many Ecuadoreans on Wednesday. The country’s banking industry did not immediately comment.

Approved Tuesday evening by a 68-21 vote, the bill also covers loans by banks to first-time purchasers of automobiles that cost up to $29,200.

President Rafael Correa, a leftist economist whose social spending has made him widely popular, praised the legislation but did not say whether he would sign it or possibly seek amendments.

The president, who constantly rails against Ecuador’s “oligarchs” and has already moved to diminish the power of banks, accused the lawmakers who voted against the measure of “defending the bankers, not the depositors.”
The law appears to be unique.

San Diego State University economist Michael Lea, a real estate specialist, said the only similar measure he was aware of was the creation of a national housing bank by the leftist Sandinista movement in Nicaragua after it won power in 1979.

Ecuador’s Association of Private Banks did not comment on the new legislation, though its director, Cesar Robalino, previously said the measure would discourage new home construction and make getting mortgages more difficult for consumers. He told a radio station Wednesday that a commission of three bankers was seeking a meeting with Correa to discuss the legislation, among other issues.

Pablo Davalos, an economist at Catholic University, said the move would be good for most Ecuadoreans.
“This law is positive for the consumer and negative for the banker, who now has to increase his reserves and that means less liquidity and less profit for the bankers,” Davalos said.

Lea said the housing bank created by the Sandinistas turned out to be “fairly ugly” as people were allowed to essentially stop paying their debt and the government had to step in and make up the shortfall. He called the Ecuadorean law “a big deterrent to any future lending.”

The bill’s sponsor, Paco Velasco of Correa’s governing Alianza Pais, told reporters that if Spain had passed a similar law a decade ago it could have avoided its costly real estate bubble.

Spain is now the focus of Europe’s debt crisis, its banks burdened with tens of billions of dollars in bad loans from the bubble that burst in 2008, mostly affecting Europe and the United States. On Wednesday, it said it would effectively nationalize its fourth-largest bank.

Blamed for the housing bubble, in the U.S. in particular, were profit-hungry mortgage lenders who made loans to poorly qualified buyers and financial institutions that bundled those low-quality mortgages together and sold them as financial products whose value later plummeted.

No such bubble occurred in Latin America, where banks were more conservative. Housing prices in Ecuador have thus never fallen to levels where banks, after recovering foreclosed homes, have gone after other assets of those who defaulted.

“This law is good because often we debtors don’t have secure work or income. So in the worst of cases, where one must return an apartment, at least they don’t suffer further,” said Natalia Quintero, a secretary in a lawyer’s office who is buying an apartment in Quito’s center.

Another new home-buyer, communications engineer Eduardo Benitez, was also pleased with the law. “Whatever law protects the common people is always welcome,” he said.

In Ecuador, 63 percent of families own their own home, according the U.N.’s Economic Commission for Latin America and the Caribbean. Mortgage interest rates range between 8.5 percent and 10.25 percent, and home mortgage lending has been growing at 20.7 percent a year.

Analyst Risa Grais-Targow of the Eurasia Group, said she believes it is part of Correa’s preparations for a re-election bid next year.

“A move to protect consumers obviously plays nicely to a lot of his potential voter base,” she said. “We’ve seen a recent track record of (him) infringing on or targeting the financial sector.”
That includes laws that prohibit banking executives from sitting on the boards of corporations in other business sectors and that are forcing Ecuador’s biggest banks to sell financial service businesses including insurance and stock brokerages.

The strategy differs from that of Correa’s ally in Venezuela, President Hugo Chavez, who has nationalized about a dozen banks and now controls about a quarter of the country’s banking sector.
A presidential election date is not set and Correa, in office since January 2007, has not declared his candidacy.

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